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HERO MOTOCORP (Buy) - Excise cut impacts margins, business outlook remains strong




Motilal Oswal Securities Ltd.


06 Aug 2014





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HERO MOTOCORP 1QFY15: Excise cut impacts margins, business outlook remains strong (HMCL IN, Mkt. Cap USD8.5b, CMP INR2584, TP INR2796, 8% Upside, Buy) HMCL’s net sales grew 14.2% YoY to INR69.9b on volume growth of 10% YoY, while realizations grew 3.9% YoY (+0.5% QoQ on price hike). Scooter sales were robust with 16.2% growth, while motorcycle growth recovered to 9.3%. Adj. EBITDA margins at 10.1% (est 11.7%) declined 100bp YoY (up 40bp QoQ). Impact of excise duty cut on excise exempt Haridwar plant (40% of volumes) at ~INR940m in 1QFY15 (v/s ~INR320m in 4QFY14) led to 70bp rise in RM cost to 73% (est 72.5%). PAT grew marginally by 2.6% YoY to INR5.6b (est INR6.8b), reflecting weak EBITDA growth Announced an interim dividend of INR30/sh (v/s total of INR65 in FY14). Management commentary: a) Rural demand continues to remain healthy, barring few pockets, b) Expects double digit growth in 2QFY15. Channel inventory is comfortable at 4 weeks, c) After witnessing deferred of replacement cycle over last 2 years, it is now seeing good replacement demand, d) Saved about INR320m/month in 1QFY15 (v/s ~INR250m in 4QFY14) under the margin improvement initiative. Target of ~INR500m/month by 4QFY15, e) 1QFY15 cost savings of ~INR970m, was diluted by ~INR660m cost inflation, and f) Dividend policy of 50-60% payout. Valuation & view: Volume upgrade partially offset margin cut impact HMCL is embarking on a favorable product life cycle, with two promising new launches in FY15 (110cc Scooter, 250cc premium motorcycle). Expect 11.6% volume CAGR over FY14-16E on industry recovery and new launches. Adjusted EBITDA margins to improve from 10.1% to 13.5% driven by expiry of royalty amortization and cost reduction measures. We cut FY15E/16E EPS by 2.9%/1.2% to INR140.3/174.7 respectively. Current valuations at 18.4x/14.8x FY15E/16E EPS coupled with 3.1% (FY16) dividend yield appear attractive. Maintain Buy with a TP of INR2,796 (16x FY16E).

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